Want Proof the Credit Cycle Has Turned? Here It is …

Over and over, I’ve stressed a cautious, careful and defensive investment stance since early last summer.

Investors who heeded my advice avoided the meltdown last August and September … and the secondary plunge in January and February. Those who subscribed to my All Weather Trader service actually had the chance to generate significant profits from them.

Now, I’m here to warn you — again — that the primary reason for my caution is striking with full force. I’m talking about clear, irrefutable evidence of a major turn in the credit cycle. Many experts on Wall Street aren’t paying enough attention, and I don’t want you to make the same mistake.

Look at this chart of shares of Synchrony Financial (SYF), and what do you see? A huge 13%, one-day drop on Tuesday.

You may not have heard of Synchrony, but if you have a store-branded credit card, there’s a good chance you do business with the firm. Its clients include Lowe’s (LOW), Stein Mart (SMRT), Amazon (AMZN), and Dick’s Sporting Goods (DKS). The company also finances the purchase of bigger-ticket consumer items. They include furniture, electronics, ATVs, and motorcycles for the likes of Rooms To Go, hhgregg (HGG), and Yamaha Motor Corp. (YAMHF).

SYF was spun off from General Electric (GE) almost two years ago, and it now manages more than 66 million credit accounts and around $66 billion in receivables. That’s a great business to be in during the expansion phase of the credit cycle, because receivables boom and delinquencies plunge. It’s why the stock surged from around $23 two years ago to as high as $36 last summer.

But then, SYF began to wilt. And after rallying along with the market since February, the stock just got crushed. So did shares of other companies in the credit card and consumer finance business, including Capital One Financial (COF), Ally Financial (ALLY), OneMain Holdings (OMF), and American Express (AXP).

That catalyst was a warning from Synchrony that its customers were increasingly falling behind on payments and that its attempts to cure those delinquencies weren’t as successful as before. The company raised its forecast for expected credit losses by just 0.2 to 0.3 percentage points. But that was all it took to send investors fleeing for the exits.

Why? Because we’ve just experienced the biggest “Everything Bubble” in history! I’ve hammered away at the auto loan bubble relentlessly for months, and we’ve also seen a massive bubble in student loan debt. Delinquencies on student loans are at sky-high levels, and they’re rising on lousy car loans, too. Throw in tightening lending standards and rising future losses in other categories, such as commercial and industrial and commercial real estate lending, and you’ve got a recipe for a real credit crack up.

My advice? Drown out the happy talk from Wall Street and the latest central bank mumbo jumbo, and focus on what really matters. The credit cycle has turned. The economic cycle has turned. And if you don’t turn with it, you risk getting your portfolio run over.

Or in practical terms, stick with defensive sectors like utilities, consumer staples, and telecoms. Favor high-grade bonds over risky ones. Hedge your downside risk with inverse ETFs or put options. Or if you’re more aggressive, zero in on the most vulnerable stocks in this phase of the cycle and go for downside profits using tools like my All Weather Trader service.

Until next time,

Mike Larson

Recommended Articles by Mike Larson:

Mike Larson graduated from Boston University with a B.S. degree in Journalism and a B.A. degree in English in 1998, and went to work for Bankrate.com. There, he learned the mortgage and interest rates markets inside and out. Mike then joined Weiss Research in 2001. He is the editor of Safe Money Report. He is often quoted by the Washington Post, Reuters, Dow Jones Newswires, Orlando Sentinel, Palm Beach Post and Sun-Sentinel, and he has appeared on CNN, Bloomberg Television and CNBC.

{24 comments }

al rothFriday, June 17, 2016 at 7:48 am

utilities are sky high now

John BFriday, June 17, 2016 at 8:34 am

Yes they are Al. For example, NiSource (NI) split with NIPSCO last summer and have had a nice steady increase since. I just wish I bought into NIPSCO this past March before the announced sale to TransCanada. At least I got lucky with Nisource. Oh well, win some lose some. I believe there are plenty of more opportunities now and in the near future. Happy Trading.

StevenFriday, June 17, 2016 at 7:57 am

Thanks MIKE. I WILL DEFINITELY HEED YOUR ADVICE.

Bruce D. NoyesFriday, June 17, 2016 at 8:09 am

Alumni-to-alumni, thank you for the heads up.

GordonFriday, June 17, 2016 at 8:10 am

Mike of all the people whose letters I browse (basically because I cannot afford them and a lot of them conflict with each other so I question their value) yours is the very best. All your conclusions make sense/logic. I like the way you have it structured with stock market results on the right hand side and common sense on the other. I am a small time investor doing things on my own. I follow Larry a lot as I am into precious metals basically as fiat money looks like being on the edge of anarchy. Keep up the good work you deserve a pat on the back once in a while

AndyFriday, June 17, 2016 at 8:42 am

Hi, can anyone give thoughts on the all weather trading service? Contemplating joining and be good to hear some thoughts from people who use it :)
Thanks in advance

BillFriday, June 17, 2016 at 8:54 am

My area I live in apparently doesn’t listen. I’ve never seen so much commercial expansion in my life. Many new office buildings, strip plazas and almost every car dealer is remodeling. I’ve also never seen so many cars on dealer lots. They are even leasing empty land for all their inventory. Not sure who they think is going to fill all this space or buy all these cars. Time will tell.

Chuck BurtonFriday, June 17, 2016 at 10:28 am

If dealers were selling all those new cars, would they need more storage space? Such a surplus is not exactly a good thing for them. Nor would they need to advertise all those “thousands off” sales promos. In my area, a local supermarket chain, popular since WWII, is closing down their dozen+ stores. Other stores are both closing and opening. A new open plaza, opening in Sept., will probably be okay with a huge Wegmans sooper-dooper, a number of food/booze pad places, an office building for a hospital/health group, etc.; but the Sports Authority is kaput, and who knows about the other clothing stores and such. The big mall about a mile away, closed last year, and will be torn down soon.

Jorge RivasFriday, June 17, 2016 at 10:11 am

I will echo what Bill has to say. We have big industrial parks that have been sitting vacant for many years. However, office buildings, auto dealerships and restaurants are popping up everywhere like mushrooms. Unemployment is among the highest in the country and large employers continue big layoffs with a noticeable trickle effect. Here in South Texas on the border, they’re banking on Space X to come in years from now and banking on millions of Mexicans to come over, shop & vacation. This definitely corroborates what you’re saying–low wages, soaring, easy credit, unemployment, stagnant economy, etc. Thanks for the heads up.

DenisFriday, June 17, 2016 at 11:07 am

Hi Mike,
Great article.”bread eaten is soon forgotten” People easily forget,and NEVER learn from history.Debt is debt,anyway you cut it.Keep up the good work.
Denis

$1,000 gold™Friday, June 17, 2016 at 11:21 am

i remember you said it, mike! good call. i think we could see the 10-year below 1.25% before year’s end. so, what happens after everybody piles in??? this pimple will pop too!

KenFriday, June 17, 2016 at 11:40 am

If this house-of-cards economy completely collapses, as it must, what happens? Do the banks simply jump in and grab what they can, or is there another possibility?
This fiat money economy has lasted longer than most, because the government has kept us free of good economic information. There are so few places where one can learn real economics. I’ve talked to people who have Ph.Ds in economics, who were completely ignorant of the most important economic principles. The banksters certainly do not know or care. I was lucky. I studied with AIER.

FozzieFriday, June 17, 2016 at 1:21 pm

The economy sucks because there are no damn jobs. I dont know what people are smoking when they say unemployment is 5%, its more like 45%. I haven’t had a FT job in 5 years! I cut down all my expenses to bare bones, i save all my part-time income, take no vacations. I used to spend tens of thousands a year, now my annual expenses are less than $2,000. Because i’m smart, i own my own home, so r/e taxes are my biggest exp.

Human resouces has RUINED the job market. They actively discriminate against the unemployed. I hope these idiots and morons lose their jobs and have to struggle for work. Eliminate the HR function altogether!

VinmanFriday, June 17, 2016 at 9:55 pm

Fozzie

You are right about the 5% unemployment . I believe it must be in the double digits ! Also let me add one more thing to your list . Those who say there is no inflation must be smoking something also . Do these people ever go to a grocery store ??? While prices have been rising there also was a new thing called stealth inflation where packages got smaller with less product in them and the prices stayed the same . The biggest example being the Half Gallon Ice Cream container which has now gone extinct !
Vinman

Virginia S.Saturday, June 18, 2016 at 10:06 pm

They also discriminate against recent college grads. Their ads often require two to three years of experience. Aside from internships, how are new grads supposed to learn a business if they can’t get a job?

NelsMonday, June 20, 2016 at 1:07 pm

Shadowstats (google it) says that unemployment is in the mid-20% range, by the way we used to count it. That sounds about right to me: I remember the Carter malaise, and this seems worse. Something like 15% of Americans are on food stamps, which correlates well with the Shadowstats unemployment number.

To put it in perspective, 25% unemployment was the depths of the last great depression.

Great Depression levels of unemployment, and the credit cycle is about to swing _way_ down? What a surprise!

ChadFriday, June 17, 2016 at 5:42 pm

Here in BG Kentucky the economy is pretty good.
There are factory jobs available constantly, new businesses, strip malls, gas stations, etc being built. We are on I 65 hour North of Nashville with the corvette factory and museum, (factory is expanding). Mammoth cave is 35 mins away, these tourist destinations seem to help our area.
I do agree the real unemployment rate has to be much higher with record numbers ( around 94,000,000) no longer employed and record numbers on food stamps, partially due to the 52%increase in immigration in the last few years.
Low fuel costs are helping the economy greatly, if gas go back to 3.50 consumers won’t have the extra money anymore.

Steve A RenoSaturday, June 18, 2016 at 11:16 am

Chad, food stamp use and immigration are not correlated. Illegal immigrants are not eligible for food stamps. You must be a U.S. citizen to apply. Just facts, not emotion. Unemployment rate is low. There are lots of help wanted signs and advertising for such. You are right about gas prices. When they go up you’ll see lots of loans and credit cards go bad.

NelsMonday, June 20, 2016 at 8:11 pm

Even if immigrants are not eligible for food stamps, they take jobs from Americans who are eligible. Immigration increases unemployment – unless you believe that every immigrant is on welfare.

george shortSunday, June 19, 2016 at 11:34 am

I hold the XLF Financial put option. It is very much out-of-the-money at the present time. It is long-dated, however.

velascoSunday, June 19, 2016 at 7:27 pm

Mr. Larson…….my mother has recently invested in Gold….much to my (advice no to) am I wrong..,,,,,,,,???

NelsMonday, June 20, 2016 at 1:09 pm

Can’t answer for Mr. Larson, but my thought is that everyone should have 5% to 10% of their capital in gold. Usually, they shouldn’t have much more than that in gold.

JamesSaturday, June 25, 2016 at 10:18 am

This article is very informative. But I would like to reiterate there’s no such thing as free money or free time. Time is money as ex prime minister Benjamin Disraeli used to say.

JERRYSunday, June 26, 2016 at 3:40 pm

my friend ask me ,how to invest his 250k saving acct.he went with fidelity investments they advise him to invest in there” 99 stocks portfolio” ,is this not a Good choice ,they donot have a STOPLOSS ,on the portfolios.Keep money and “Think”, he was 78yrs old.